Rebuilding confidence, asset quality: Kathpalia's tasks at IndusInd Bank

Tuesday's stock reaction is also an indicator of the challenges ahead of him and probably the toughest faced by the bank in the past decade

The transition from a cabin to corner office for Sumant Kathpalia, the newly appointed managing director & chief executive officer of IndusInd Bank, comes at a time when few things are working in favour of the lender, especially asset quality and its stock price, which hit the lower circuit thrice during Tuesday’s opening trade. Though there was some recovery, the stock closed with a loss of over 7 per cent. 

Kathpalia may have hoped to be welcomed better by the bourses on his first day as IndusInd Bank’s new boss. But, Tuesday’s stock reaction was also an indicator of the challenges ahead of him — probably the toughest faced by the bank in the past decade. 

At Rs 312.35 apiece, IndusInd Bank (IndusInd) trades at an eight-year low and at these levels, it also indicates that investors' risk-aversion may be the highest for the stock. From that standpoint, Kathpalia has two critical and urgent tasks cut out — revive investors’ confidence and stabilise asset quality.

Outgoing MD & CEO Romesh Sobti, who was at the helm for over 12 years, had tried to assuage these concerns. “But with each passing day and lockouts gripping the country, one isn’t sure how much to accept these words from the management as positive guidance,” said an analyst from a domestic brokerage. Even last week, Sobti reassured investors that the bank’s net non-performing assets (NPA) ratio would fall to less 1 per cent from 1.05 per cent seen in the December quarter (Q3). 

However, in the current circumstances, analysts say, for at least three consecutive quarters under Kathpalia’s leadership, the bank needs to post good numbers both on growth and asset quality. This becomes imperative if his aim to repair the bank’s image. “Resorting confidence is critical and the new management will have to rebuild the trust with investors,” says Kajal Gandhi of ICICI Securities. 

The Street turned cautious on IndusInd when for two successive quarters, its gross NPA ratio stayed unabated in the 2.18-2.19 per cent range. “Unless we see good numbers, it’s tough to think that net NPA ratio could fall to less than 1 per cent,” said another analyst. 

What compounds the problem is the sustainability of loan growth. At 20 per cent growth, Q3 was a forgettable quarter for the bank. “He (Kathpalia) is moving into the driver’s seat when the economic slowdown will entrench further,” says a senior executive of another private bank. “It will bite every sector of the economy and put severe pressure on income and asset quality.” 

The silver lining is that Kathpalia isn’t an outsider to the bank and hence, the ritual that most incumbent CEOs do — clean up the books, churn top-level management — may not be the case with him. “So the probability of kitchen sink cleaning appears low,” says Gandhi. Therefore, she says what has already been identified as stress could only come under the hammer and no fresh worms could come out.

While IndusInd's exposure to three stress accounts (Zee, Anil Ambani-Reliance, and DHFL) declined to 0.47 per cent in Q3 from 1.1 per cent Q2, JPMorgan observes that the bank's telecom and real estate sector exposure (9.2 per cent of loan book) remains a concern and potentially an overhang. New stress may also emerge from the microfinance and SME book, amid the events taking shape in the economy. 

The other favourable aspect is his leadership in the consumer banking business (over half of the bank’s retail loans). Under Sobti, the bank has realigned its book to equally account for retail and wholesale loans. Kathpalia’s task is to take this “retailisation” story forward, which given his background appears a reasonable ask.

A similar rebalancing in liabilities, especially deposits, also works to the bank’s advantage. Unlike peers, IndusInd has been able to retain a sizeable chunk of low-cost current account-savings account (CASA) deposits in the last two years and at 42.4 per cent in the December quarter, it is placed in a sweet spot to tackle a moderate increase in the cost of funds. “Increasing share of retail deposits is also going to test Kathpalia’s leadership,” says a banker. Whether IndusInd has strived to retain its retail depositors’ confidence amid the YES Bank fiasco will soon be known.

With 5.73 per cent blended cost of capital and net interest margin at an all-time high of 4.15 per cent in Q3, thanks to its high-yielding retail (including microfinance) book, Kathpalia may find a helping hand in these tough times.  The new boss' ability to deliver on these fronts will be the critical piece to regain the Street’s confidence.